SC House GOP Sales Tax Plan Addresses only 8 % of Exempted Sales

Leaving the cap on sales taxes on cars untouched, the much ballyhooed elimination of “two-thirds of the special interest sales tax exemptions” in the SC House Republican Caucus’s comprehensive tax reform plan only effects 8 % of sales and use tax exemptions— $218 million of the $2.8 billion.  [All figures are from the BEA’s Sales and Use Tax Exemptions FY2008-09].  That’s not going to reduce overall rates very much.

This is not surprising.  The real money in sales tax exemptions is in prescription drugs purchased at pharmacies ($585 million), groceries ($354 million) and electricity or other fuel used for home heating ($188 million). That is not to mention the $253 million from sales to the Federal government that is not taxable under the US Constitution or the $500 million in highway fuel that is simply taxed another way. Altogether, that’s $1.88 billion of the $2.8 billion “sitting out there” in sales tax exemptions.

The House GOP left the most egregious exemption, a $300 cap on sales tax on cars, yachts, motorcycles  and airplanes despite earlier news reports that the cap would be phased out.  The elimination of a cap that taxes a $6,000 used car the same as a  $2.4 million Bugatti Vayron would have added $173 million to the exemptions eliminated, 80 % more.

So, who are the “special interests” whose exemptions are eliminated?  Telephone and ATM users lead the list at $74 million.  Next come Lottery ticket purchasers.  Of the $218 million eliminated, 22 % ($48 million) comes from taxing Lottery tickets.  The next special interest is students and libraries.  Books, textbooks, access to online services and other printed material used in schools (K-12 and higher ed) or for use in a school or publicly supported library would be taxed.  That’s $22 million.  Bible readers are apparently a special interest, too, since taxes would be added to purchases of “the Holy Bible,” newspapers, books, magazines and periodicals.  Twelve million dollars from the special interest group of readers.

An actual special interest, “radio and television stations, and cable television systems” would be liable for purchases used in producing, broadcasting, or distributing programs, an exemption which now saves them $9 million.

The next “special interest” is old people, really old people.  Elimination of the penny exemption for seniors 85 and older would add $5 million to eliminated exemptions.  Age-based tax preferences are bad public policy, but fixing this one won’t help much to lower the overall sales tax rate.

Two exemptions which have received press attention for their proposed elimination are the gun sales tax holiday over the Thanksgiving weekend and the back to school sales tax holiday in August.  Eliminating the gun holiday in the Code is only clean up.  The Supreme Court invalidated the law which enacted it.  It has continued, until this fiscal year, as a budget proviso.  The August sales tax holiday costs the state $3 million in tax revenues.  As the Tax Foundation notes, sales tax holidays are “Politically Expedient but Poor Tax Policy”.  It’s still not much money.

Every sales tax exemption has a lobbyist attached to it.  The $73 million proposed to come out of customers of phone companies and banks won’t go unchallenged.  Dry cleaners ($3.2 million), movie theatres ($2.8 million), hearing aid dealers ($2.1 million), amusement parks ($3.9 million), motor vehicle extended service or warranty peddlers ($1.2 million) and firms doing research and development ($2.6 million) won’t simply sit back and accept new taxes.  The retailers who will lose the $22 million reimbursement for collecting taxes in the form of a discount for taxes timely paid will be raising sand.  This proposal will not emerge unchanged.

In its report, the Taxation Realignment Commission (TRAC) proposed taxing a number of additional services and intangible goods, like digital goods, software and data processing, using the proceeds to reduce the overall tax rate. They recognized that we have moved from consuming goods to consuming services.  There are no such proposals here.

The  House Republicans had a real opportunity to fix serious issues in our sales and use tax code.  They passed on eliminating a car tax cap that only car dealers think makes sense.  They passed on taxing additional services and intangible goods.  Instead, they repeal numerous chump change exemptions making up only 8 % of the total currently exempted taxes.  That should lower sales taxes by half a penny—not the nearly three cents implied by the Caucus brag that it is eliminating two-thirds of those exemptions.

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